A new year can be the perfect time to reassess spending habits and set new financial goals. But that task becomes a little challenging if equity and crypto prices are falling all around you. Bitcoin (BTC 2.15%), Ethereum (ETH 1.01%), Solana (SOL 5.92%), and Cardano (ADA 4.72%) are now all down 34% to 60% off their all-time highs.
After a brutal sell-off on Jan. 10, the crypto market has since stabilized. Industry watchers know that crypto can soar or plunge in a flash despite how good the short-term prospects appear. Here are three things you can do to prepare for more pain in the crypto market in 2022.
1. Achieve your desired crypto allocation
Without realizing it, it's easy for an investor to under- or overallocate into a particular security or industry. Improper allocation weightings can exaggerate losses in a hurry, especially during a swift sell-off.
Each investor has a different risk tolerance, especially when it comes to crypto. Having less than 1% allocated toward crypto is reasonable for investors merely looking to dip their toes into an emerging asset class. For others, maybe something like 5% to 10% is enough to make an impact, but also low enough so that extreme losses won't crash an entire portfolio.
Determining your desired crypto allocation is a personal decision that will ultimately depend on your risk tolerance, interest in the industry, and time horizon. With crypto prices on sale, now is as good a time as any to bridge the gap between your actual crypto allocation and your ideal allocation so that there are no surprises if crypto prices keep falling.
2. Revisit your crypto holdings
Knowing what you own and why you own it offers the best way to stick with an investment through good times and bad. If you can't explain to a friend why you own a stock or crypto, then what's to prevent you from selling during a bad time or not selling if the asset is way overvalued?
The easiest way to solve this problem is to stick with the biggest and "safest" names in the industry -- Bitcoin and Ethereum. For most investors, simply dollar-cost averaging into Bitcoin and Ethereum while maintaining the desired allocation is arguably the simplest and lowest-stress way to expose your portfolio to the industry. Both cryptos have plenty of long-term upside and compelling intrinsic value.
Earmarking a small portion toward an altcoin (essentially, anything other than Bitcoin) or two isn't a bad idea if it's something you believe in and are willing to patiently hold for years. Again, it comes to understanding different types of cryptocurrency and keeping allocations in check.
Image source: Getty Images.
3. Map out hypothetical scenarios
A good exercise that's helped me through past market crashes is to map out what I would do and how I would feel under different scenarios as a means to stress test my portfolio and my emotions. If Solana falls 20% and you're trading it on margin (using borrowing money) and have the majority of your life savings in it, then you would probably suffer a major financial setback and too many sleepless nights.
By mapping out what you would do if your crypto portfolio fell 10%, 25%, or 50%, you'll feel more in control of your finances and stand a better chance of making a calculated decision at clutch time. If your answer to crypto crashing 25% is to either do nothing or buy more, then you're probably in a great place. If you'd have to work weekends or sell your prized baseball card collection to make ends meet, you should probably take a good hard look at your portfolio and make adjustments to safeguard your financial health.
Concern yourself with only what you can control
No one knows when or in what form a market crash will come. In 2008, it was the end of the housing bubble and the meltdown in the subprime market. This time it was a pandemic that brought the global economy to its knees.
It's anyone's guess if a crypto winter arrives in 2022 or not. The best thing you can do as an individual investor is manage what's in your control and not worry too much about what's outside of it.
